The audit, conducted by San Francisco-based Harvey Rose and Associates and commissioned by the Santa Cruz County Grand Jury, says the city is in poor financial shape, a condition partly due to the national economy but worsened by inadequate budget controls and deficit spending.

The grand jury released the report Thursday.

"Did we get anything new out of this $90,000 report? I'm not sure," Mayor Lowell Hurst said. "Could the money have been better spent on health and human services? Absolutely."

The auditor, who could not be reached to comment Thursday, compared Watsonville to several cities of like size and ethnic mix, and found Watsonville spends more per capita, has less cash on hand, and ended the 2010-11 fiscal year with a much smaller balance in relation to its expenditures than others.

City Manager Carlos Palacios challenged both the comparisons and the financial analysis.

Instead of Central Valley towns, he said, the auditor should have looked at Central Coast cities that face a similar cost of living and where Watsonville's spending is below the median.

Further, Palacios said, the auditor included a $6.5 million loan to cover a payment to the state retirement system in one year's expenditures though it will be paid during a 13-year period. That made spending in 2010-11 look higher than it was and skewed comparisons, he said.

Spending Decisions

The auditor also didn't consider the advantages of the retirement loan, officials said. The charge resulted from a recalculation of pension liabilities, and the state system was willing to loan the city money to cover it. But by borrowing money from its own funds, the city cut the interest rate in half and added about $275,000 to its annual cash flow.

"You have to look at the numbers and the rationale," said Ezequiel Vega, administrative services director.

Palacios acknowledged spending has outpaced revenue in recent years. But he said after making significant reductions to other departments, city leaders made a deliberate decision to draw down reserves and try to wait out hard times rather than cut police officers.

"There is a risk (to deficit spending). We all know that," Palacios said. "But there's also a risk to cutting police."

The auditor also pointed to operating deficits at the Watsonville Municipal Airport and at city parking garages and to police and fire department overtime as problems. Neither issue was news to the city, which has been working to get a handle on overtime -- and having more success with police than fire -- and has taken steps such as raising fines for parking tickets to offset garage costs.

City officials also agreed that financial reporting could be more efficient and that some policies need updating, but said that would require money Watsonville doesn't have to spare. Vega estimated a much needed upgrade to outdated financial software would run $500,000. To implement all of the auditor's recommendations would cost upwards of $800,000, he said.

Palacios said he has shifted some work from an "overburdened and understaffed" finance department in the coming year so staff could focus on improving its systems.

ANOTHER LOOK

Grand jury fore Lise Peterson said the audit was commissioned after the oversight body found the city's response to its investigations into financial decisions and practices in 2010-11 and 2011-12 "not encouraging." City leaders have said most of the criticism in the two probes was unfounded.

Peterson said the grand jury remained concerned, and recognizing its "amateur" status, hired professionals to take a look. The idea, she said, was to help Watsonville to better understand its situation and make improvements.

"That was the spirit we introduced it in," Peterson said. "We're supposed to help entities improve their efficiency. That's our role."

The county, under court order, had to pay for the audit from its general fund. The auditor's bill came to $88,630.